Intel’s Upside/ Downside Scenarios For Our $31 Valuation

Intel (NASDAQ:INTC) has been the undisputed leader in PC microprocessor market for the last two decades. Amid the slowdown in semiconductor market last year, Intel not only managed to retain its dominance but also registered a slight gain in its market share. However, the expected entry of ARM-based players in the segment this year and AMD‘s (NYSE:AMD) growing efforts to regain its lost server market share will ensure that the company does not rest easy.

There are certain factors that Intel needs to be wary of if it wants to continue enjoying its current market share. With the much awaited entry in the smartphone chip business early this year, Intel proved its willingness to drive innovation that supports changing consumer trends. (See: Intel Dials up $31 With Smartphone Push and Intl. Growth) Though the entry in the smartphone and tablet market can be an important strategic move, we do not feel that any upside or downside in the same will have a major impact on Intel’s valuation, as it currently accounts for only 1.5% of our price estimate of $30.62.

Following a decline in 2008 and 2009, Intel’s average notebook processor price has picked up in the past couple of years. It came down from about $122 in 2007 to $96 in 2009, but again reached the $122 mark in 2011 due to an improved economy that supported richer processor mix, as well as the launch of higher priced Sandy Bridge CPUs in 2011. We expect the average price to remain more or less constant in 2012 and decline thereafter, as competition from ARM-based microprocessor manufacturers intensifies.

However, continued innovations such as the Sandy Bridge chips could justify a higher average price for Intel’s notebook processors in the future as well. In the likelihood of our estimate being too pessimistic, there is scope for possible upside in our price estimate. If the average price remains in the $120-$122 range throughout the forecast period, there would be a 4% upside to our price estimate.

2. Intel Maintains its Market Share in the Server Market (+2%):

Intel’s server market share has registered a y-o-y increase from about 85% in 2007 to close to 94.5% in 2011. As AMD puts in additional efforts to regain its lost share from Intel, we expect Intel to start losing some of its gained market share going forward, but retain its dominance at 79% by the end of our forecast period.

Historically, Intel lost some of its market share to AMD’s Opteron series of processors, but it bounced back with the introduction of its Xeon processor in 2006 that helped it regain share. The possible scenario of similar innovations in the future could help cushion Intel’s market share decline. If it is able to retain 88% market till the end of Trefis forecast period, then we could see a 2% upside in our price estimate.

3. Intel Dominates the Notebook Processor Market (+2%):

Intel has managed to dominate and retain a large share of the notebook microprocessor market historically, though the figure has slightly come down since 2008. Assuming an increase in demand in AMD’s lower-priced notebooks from emerging markets and the slated entry of ARM-based players in the PC microprocessor market by 2012, we estimate Intel’s market share to decline marginally by the end of our forecast period.

However, with improved process technology, it is possible for Intel to retain its current market share. Moreover, most high-end notebooks are based on Intel processor and the brand itself gives it the added price premium in the marketplace. If Intel retains its market share till the end of our forecast period, we could see a 2% upside to our price estimate.

12% Downside Scenarios | $26.82 Price Estimate

1. Competition from AMD in Emerging Market Could Push Down Prices (-4%):

An increasing share of notebook demand is coming from emerging markets. China and India are big markets with the former representing about 20% of the global PC demand. AMD has typically targeted the value segment and is expected to continue to do so. With the developing markets being the growth engine for the global PC market, we could potentially see price competition for greater market share, going ahead.

Additionally, competition from tablets can also force notebook manufacturers to push down prices to increase sales. If Intel’s average notebook processor price were to fall to $95, there would be a 4% downside to our price estimate.

Apart from AMD, which is looking to regain server market share with its new chips based on Interlagos design available at various prices, there is an additional threat of a possible entry of ARM-based players in the server market. The entry of ARM-based players during our forecast period could further put pressure on Intel’s market share. If Intel’s market share were to drop down to 65% by the end of our forecast period, there would be a downside of 4% to our current price estimate.

3. Emerging Market Growth Could Favor AMD over Intel (-5%):

With a lower per capita income and lower buying power, customers in the emerging markets are likely to opt for lower-priced notebooks, and this would work in AMD’s favor. AMD recently introduced its Trinity chip for ultra-thin laptops which claims to provide better power at a lower price. Intel’s ultrabooks are expensive and AMD will look to gain some share with its price advantage. (See: AMD’s Trinity Chips to Challenge Intel Powered Ultrabooks)

Moreover, with ARM-based players entering the PC market in 2012, Intel is bound to lose some share due to added competition. If Intel’s market share were to fall to 65%, this would lead to a downside of 5% to our price estimate.

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